Roth Conversion and RMD
We have a client who is over 72 years old so has to take RMD in 2008. We want to convert a portion of IRA to Roth now and take RMD toward end of year. Trustee is insisting that IRS requires client to take RMD before processing a conversion. Seems to me that as long as he satisifies the RMD it should be irrelevant in which order he does them. Can you shed any light on the issue.
Glenn
Permalink Submitted by Alan Spross on Fri, 2008-04-04 18:25
Glenn,
Technically, the trustee is correct. A Roth conversion is actually a distribution and rollover EVEN if done by direct or same trustee transfer. Since it is a distribution, the RMD requirements are deemed satisfied by the first distribution taken in a year. Since the RMD requirement is not rollover eligible, you have this technical violation if the conversion is done prior to the RMD. The correction would require treating the RMD as an excess contribution to the Roth, and withdrawing it plus earnings.
Due to IRA aggregation rules with respect to RMDs and no listing of dates on 1099R forms, it is doubtful the IRS would even be aware of this violation lacking an audit for unrelated issues. As a result, there is rarely a correction requirement triggered if the conversion gets done first. The only tax penalty involved in the correction procedure is that the earnings on the RMD amount of the conversion would be distributed out of the Roth and become taxable.
Permalink Submitted by Glenn Wager on Fri, 2008-04-04 19:16
Alan – Thank you for the thorough respone. One follow up question. Does the same answer hold for a individual who turns 70.5 in 2008, but is not required to take an RMD until April 2009. In other words if that person does a conversion in 2008 would part have to satisfy the 2008 RMD even if they wanted to defer it until 2009?
Glenn
Permalink Submitted by Alan Spross on Fri, 2008-04-04 20:59
Good point – and yes it does because the first distribution in the year of attaining 70.5 is also deemed to be the RMD for that year. Therefore, for that particular year, a Roth conversion will force the RMD to come out even earlier than it might otherwise have to.